Peavy v. Skilled Healthcare Grp., Inc.

• Decision Date: 06 April 2020
• Docket Number: NO. S-1-SC-37370,S-1-SC-37370
• Parties: Beverly PEAVY, Deceased, BY the Personal Representative of the Wrongful Death Estate, Keith PEAVY, Plaintiff-Respondent, v. SKILLED HEALTHCARE GROUP, INC., Skilled Healthcare, LLC, the Rehabilitation Center of Albuquerque, LLC, and Patricia Walker, LPN, Defendants-Petitioners.
• Court: New Mexico Supreme Court

470 P.3d 218

Beverly PEAVY, Deceased, BY the Personal Representative of the Wrongful Death Estate, Keith PEAVY, Plaintiff-Respondent,

v.SKILLED HEALTHCARE GROUP, INC., Skilled Healthcare, LLC, the Rehabilitation Center of Albuquerque, LLC, and Patricia Walker, LPN, Defendants-Petitioners.

NO. S-1-SC-37370

Supreme Court of New Mexico.

Filing Date: April 6, 2020

Rodey, Dickason, Sloan, Akin & Robb, P.A., Jocelyn C. Drennan, Sandra L. Beerle, Albuquerque, NM, for Petitioners

Pitman, Kalkhoff, Sicula & Dentice, S.C., Jeffrey Alan Pitman, Milwaukee, WI, Feliz Angelica Rael, Albuquerque, NM, for Respondent

UNM School of Law, Michael B. Browde, David J. Stout, Albuquerque, NM, Treinen Law Office PC, Rob Treinen, Albuquerque, NM, for Amici Curiae New Mexico Trial Lawyers Association and American Association for Justice

BACON, Justice.

{1} This appeal concerns the substantive conscionability of an arbitration agreement that exempts a nursing home's likeliest claim from arbitration, but requires its residents to arbitrate their likeliest claims. We are presented with the question of what analysis a court should follow when a party seeks to make an evidentiary showing that an arbitration agreement with a facially one-sided provision—e.g., exclusion of a party's likeliest claim from mandatory arbitration—is not unconscionable because it is reasonable and fair to except such a claim from arbitration.

{2} In 2012, the estate of Beverly Peavy filed a wrongful death lawsuit against several defendants, including The Rehabilitation Center of Albuquerque, LLC (Facility), a skilled nursing facility where Ms. Peavy was a resident. In response, the Facility filed a motion to compel arbitration, citing an arbitration agreement (Agreement) that was attendant to Ms. Peavy's admission agreement to the facility. After a two-day evidentiary hearing, the district court concluded that the Agreement was substantively unconscionable because it forced residents to arbitrate their most likely and most important claims, but allowed the Facility to litigate its most likely claims. This appeal followed and our Court of Appeals affirmed the district court's ruling in a memorandum opinion. See Peavy v. Skilled Healthcare Grp., Inc. , A-1-CA-35494, mem op. ¶ 24, 2018 WL 5994222 (N.M. Ct. App. Oct. 22, 2018) (non-precedential).

{3} Concluding that insufficient evidence was presented to justify the one-sidedness of the Agreement, we affirm the district court's order denying the motion to compel arbitration.

I. FACTS AND PROCEEDINGS

{4} Ms. Peavy was a resident of the Facility from 2007 until her death in 2010. Ms. Peavy's son, Plaintiff Keith Peavy, admitted Ms. Peavy to the Facility. Ms. Peavy's admission included Plaintiff entering into a seventy-eight page admission agreement on his mother's behalf. The admission agreement included the Agreement currently at issue. Under the Agreement, the parties would first attempt to mediate a claim, then, if necessary, arbitrate the claim before a panel of three arbitrators. The Facility would pay mediators’ and arbitrators’ fees, and each side would bear their own attorneys’ fees.

{5} The Agreement specified that:

By signing this Arbitration Agreement, the Facility and the Resident relinquish their right to have any and all disputes associated with this Arbitration Agreement and the relationship created by the Admission Agreement and/or the provision of services under the Admission Agreement (including, without limitation, class action or similar proceedings; claims for negligent care or any other claims of inadequate care provide [sic] by the Facility; claims against the Facility or any of its employees, managers, or members) (each, a "Dispute" and, collectively, the "Disputes"), resolved through a lawsuit, namely by a judge, jury or appellate court, except to the extent that New Mexico law provides for judicial action in arbitration proceedings.

The Agreement, however, provided the following exception: "This Arbitration Agreement shall not apply to either the Facility or the Resident in any disputes pertaining to collections or discharge of residents."

{6} Ms. Peavy died in 2010. Plaintiff brought a wrongful death lawsuit against the Facility and several other defendants (collectively Defendants) alleging various causes of action arising out of Ms. Peavy's relationship with the Facility. Relying on the Agreement, Defendants responded by filing a motion to dismiss or, alternatively, stay litigation and compel arbitration. Opposing arbitration, Plaintiff argued, inter alia , that the Agreement was substantively unconscionable and therefore unenforceable. The thrust of Plaintiff's substantive unconscionability argument was that the Agreement was unconscionable because the exceptions to the Agreement—collections and discharge of residents—were claims most likely to be brought by the Facility, which rendered the Agreement unfairly one-sided. Defendants requested an evidentiary hearing in part to present evidence showing that the Agreement's collections exception was not unfair or unreasonable.¹ The district court granted Defendants’ request, and held a two-day evidentiary hearing (Hearing) addressing the conscionability of the Agreement.²

{7} Regarding substantive conscionability, the sole evidence offered by Defendants at the Hearing was the testimony of Kathy Correa, an administrator at the Facility. As will be discussed herein, Ms. Correa's testimony was not reliable or persuasive. After the Hearing, the district court entered its findings of fact and conclusions of law. The district court found the Agreement to be substantively unconscionable because the Agreement exempted the Facility's likeliest claim, collections disputes, while requiring its residents to arbitrate its likeliest disputes. The district court concluded that, "The evidence presented by [the Facility] as to the application of the Arbitration provision failed to rebut that the practical effect of the Agreement unreasonably favors the [Facility]." The district court further concluded that the Agreement was "ostensibly bilateral on its face" but substantively unconscionable because "it mandates arbitration of Plaintiff's most important and most likely claims while exempting from arbitration the claims most likely to be brought by the [Facility] and, as such, is unfair and unreasonably one-sided." Accordingly, the district court denied Defendants’ motion to compel arbitration.

{8} Defendants appealed the district court's ruling. In a memorandum opinion, a Court of Appeals majority affirmed the district court's denial of Defendants’ motion to compel arbitration. See Peavy , A-1-CA-35494, mem op. ¶ 24. The majority held that the Agreement was facially one-sided in that the collections exception was "for a claim most likely to be pursued by Defendants." Id. ¶ 20. Additionally, the majority held that Defendants failed to present evidence sufficient to justify the one-sidedness of the Agreement. Id. A narrow dissent focused only on the evidence adduced at the Hearing, and argued that the evidence did justify the Agreement's one-sidedness. See id. ¶¶ 26-31 (Kiehne, J., dissenting).

II. STANDARD OF REVIEW

{9} "We apply a de novo standard of review to a district court's denial of a motion to compel arbitration." Cordova v. World Fin. Corp. of N.M ., 2009-NMSC-021, ¶ 11, 146 N.M. 256, 208 P.3d 901. Questions regarding substantive unconscionability present questions of law that are also reviewed de novo. See id.

III. DISCUSSION

A. Substantive Unconscionability

{10} Unconscionability is an affirmative defense to contract enforcement. See Strausberg v. Laurel Healthcare Providers, LLC , 2013-NMSC-032, ¶ 3, 304 P.3d 409. "Unconscionability is an equitable doctrine, rooted in public policy, which allows courts to render unenforceable an agreement that is unreasonably favorable to one party while precluding a meaningful choice of the other party." Cordova , 2009-NMSC-021, ¶ 21, 146 N.M. 256, 208 P.3d 901. The party alleging unconscionability bears the burden of proving that a contract is unenforceable on that basis. See Strausberg , 2013-NMSC-032, ¶ 48, 304 P.3d 409. The burden of proving unconscionability, however, does not require an evidentiary showing. See Dalton v. Santander Consumer USA, Inc. , 2016-NMSC-035, ¶ 7, 385 P.3d 619. In other words, the party bearing the burden of proving unconscionability does not have to make any "particular evidentiary showing," but rather can persuade the factfinder "by analyzing the contract on its face." Id. ¶ 8.

{11} Unconscionability can be analyzed from both the substantive perspective and the procedural perspective. See Fiser v. Dell Comput. Corp. , 2008-NMSC-046, ¶ 20, 144 N.M. 464, 188 P.3d 1215. Although the presence of both forms of unconscionability increases the likelihood of a court invalidating the agreement, there is no requirement that both forms be present. See id. ¶ 22 (invalidating an arbitration clause based on substantive unconscionability alone). Procedural unconscionability considers the factual circumstances of a contract's formation. See Cordova , 2009-NMSC-021, ¶ 23, 146 N.M. 256, 208 P.3d 901. "Substantive unconscionability concerns the legality and fairness of the contract terms themselves." Id. ¶ 22. "The substantive analysis focuses on such issues as whether the contract terms are commercially reasonable and fair, the purpose and effect of the terms, the one-sidedness of the terms, and other similar public policy concerns." Id. Substantively unconscionable contract provisions include provisions that unreasonably benefit one party over another. See id. ; see also Padilla v. State Farm Mut. Auto. Ins. Co. , 2003-NMSC-011, ¶ 14, 133 N.M. 661, 68 P.3d 901 (concluding an arbitration provision was substantively unconscionable because it limited only one party's ability to appeal arbitration awards).

{12} Arbitration agreements are a species of contract subject to generally applicable contract law,...